Profits shrink at Knights

At the end of March, Knights’ (KGH) share price plunged by 45 per cent after it issued a profit warning. The effect was felt across the listed legal sector: shares in Keystone (KEYS) slid by 13 per cent, and Gateley (GTLY) also wobbled.

Knights has now published its full-year results, which are in line with the figures set out in its gloomy spring update. Underlying profit before tax has shrunk by 2 per cent to £18.1mn, while its reported profit before tax decreased by 80 per cent to £1.1mn. The discrepancy between adjusted and statutory figures is largely due to “one-off” acquisition costs worth £13.2mn. Given the group’s aggressive acquisition strategy – which involves hoovering up regional law firms on a regular basis – it’s sensible to stick with statutory figures. 

Knights attributes its disappointing results to a difficult final quarter (to 30 April), which saw “unusually high levels of employee sickness and disruption caused by the Omicron variant” and a “slight softening in business confidence”. However, it is important to look at the company over a longer timeframe. 

Since floating in 2018, Knights’ revenue has more than tripled. Its pre-tax profits have not followed the same trajectory, peaking at just £5.51mn last year. Its acquisition strategy is clearly not translating into strong profit growth. It has also resulted in a big debt pile; borrowings combined with lease liabilities now add up to almost £80mn, up from £66.7mn this time last year. Rising staff costs could add to the pressure, despite Knights' confidence that it can offset wage inflation with fee hikes. 

Demand for legal services usually proves resilient during economic downturns and – with a forward PE ratio of just 4.7 – Knights is significantly cheaper than listed peers such as Gateley, Keystone and DWF (DWF). However, its track record is not reassuring. Hold.  

Last IC View: Hold, 416, 11 Jan 2022